ANSYS Inc

NASDAQ:ANSS

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to ANSYS’ Third Quarter 2020 Earnings Conference Call. With us today are Ajei Gopal, Senior Executive Officer; Maria Shields, SVP and Chief Financial Officer; and Annette Arribas, Senior Director, Global Investor Relations.

At this time, I would like to turn the call over to Ms. Arribas for some opening remarks. Please proceed.

[Annette Arribas, Senior Director, Global Investor Relations]

Good morning, everyone. Our earnings release, the related prepared remarks document and the link to our third quarter Form 10-Q have all been posted on the homepage of our Investor Relations website. They contain the key financial information and supporting data relative to our third quarter financial results and business update as well as our Q4 and updated fiscal year 2020 outlook and the key underlying quantitative and qualitative assumptions.

I would like to remind everyone that in addition to any risks and uncertainties that we highlight during the course of this call, important factors that may affect our future results are discussed at length in our public filings with the SEC, all of which are also available via our website. We note that the impact of the COVID-19 pandemic on our performance could cause actual results to differ materially from our projections.

Additionally, the company’s reported results should not be considered an indication of future performance as there are risks and uncertainties that could impact our business in the future. These statements are based upon our view of the business as of today and ANSYS undertakes no obligation to update any such information.

During the call and in the prepared remarks, we’ll be referring to non-GAAP financial measures, unless otherwise stated. A discussion of the various items that are excluded and a full reconciliation of GAAP to the comparable non-GAAP financial measures is included in this morning’s earnings release materials and related Form 8-K.

I would now like to turn the call over to our CEO, Ajei Gopal, for his opening remarks. Ajei?

[Ajei Gopal, President and Chief Executive Officer]

Good morning, everyone, and thank you for joining us. Q3 was another strong quarter for ANSYS meeting or beating our financial guidance on all key metrics. Our performance demonstrates that our core value proposition of helping organizations increase that top line, while driving bottom line savings continues to resonate with the market.

I’m excited that the demand for ANSYS’ multi-physics solutions is strong and growing. And it’s furthering a strategy of making simulation pervasive across the product lifecycle. Based on our year-to-date performance and the strength of our pipeline for the fourth quarter, we are increasing both the high-end and the midpoint of our 2020 guidance for ACV revenue and EPS. Maria will have the details in a few minutes.

Our prepared remarks document has details about the quarter, but let me provide some regional perspective. We anticipate that the Americas will be our strongest region for the full year. From a quarterly perspective, Asia-Pacific was strong in Q3 with Japan leading the way, reflecting our ongoing progress towards multi-physics multi-year lease deals. We expect EMEA to show a good growth in Q4 driven by the timing of larger deals.

During Q3, our enterprise and strategic account program continue to show strength with approximately 50% of our Q3 ACV coming from our top 100 customers. I’m excited that we closed a five-year $72 million lease with a North American enterprise customer, our largest agreement in the quarter and the second largest in the history of the company. This deal results in ACV and revenue in Q3 and primarily in Q4 and comes after the almost $100 million sale that we announced last quarter.

We still continued headwinds this quarter with small and medium businesses across geographies, consistent with what we have previously communicated. From an industry point of view, the high-tech, automotive and ground transportation, and aerospace and defense sectors continue to be our strongest performance for the full year.

On our past calls, I have given some additional color around particular aspects of our business. Today, I will discuss our successes in the aerospace and defense vertical. A&D is ANSYS’ second largest sector at about 18% of our trailing 12 months ACV. Although, the pandemic has impacted commercial air travel, we continue to see spending in the sector thanks to important strategic initiatives.

These include eco-friendly fuel-efficient engines, Space 2.0 initiatives such as rocket design and satellite deployments and national defense. I would like to highlight two important Q3 deals in which companies will use ANSYS simulation to develop eco-friendly or aircraft engines. These companies are relying on ANSYS to improve engine efficiency, reduce engine weight, and avoid fuel inefficient over design.

The first agreement was with Honeywell, which is using ANSYS simulation to automate its engineering workflows to maximize operational efficiency and drive process improvements. As a result, Honeywell will benefit from product wide traceability and reusability, while significantly cutting development cycle times. The second was with a major aircraft engine manufacturer that is investing $34 million over the next five years to standardize on ANSYS to achieve its vision of developing next generation engines at lower costs.

Space 2.0 companies are democratizing space by launching satellites and astronauts into orbit. And they are embracing the use of simulation to develop better products and to make smarter decisions faster. Firefly Aerospace, one of the more than 1,000 companies that have benefited from the ANSYS startup program recently announced that it has realized about $15 million in savings from using our simulation for critical tasks leading to a design that can withstand the extreme conditions of liftoff flight and space travel.

We are seeing ongoing investments in multi-physics simulation by government agencies and defense contractors, which are trying to solve next generation problems in the interest of national security. These organizations are turning to ANSYS, because of our simulation leadership and advanced multi-physics capabilities. In Q3, we saw investment from a large North American defense contractor for the design of an advanced aircraft optical sensor. To help calibrate sensor algorithms to reduce noise and blurriness due to high speed air flow, our team developed and deployed a fully coupled arrow optical solution.

This competitive win was possible not only because of ANSYS’ multi-physics leadership, but also because of the unparalleled accuracy of our products. ANSYS simulations eliminated eight weeks of testing for the company lowering test costs by 60% and increasing engineering productivity by up to 15% using the new workflow. We signed another multimillion dollar Q3 deal this time with a government agency to use ANSYS to design chips that are more secure.

This organization is relying on an important multi-physics breakthrough by ANSYS R&D, in which simulation can be used to help chip design as prevent hard to detect side channel attacks, specifically the new ANSYS offering, which is deployed and runs on the customers secure private cloud, enables chip and system designers to simulate and measure their vulnerability to security attacks while the chip is being designed. As an aside, this organization was amongst the first customers to serve the needs of its users and prime contractors using an ANSYS private cloud that is ANSYS products deployed and running on a shared secured infrastructure.

Let me move from customers to acquisitions. Last week, we announced our intent to acquire AGI a pioneer and leader in the analysis and simulation of missions, such as satellite launches, national defense and search and rescue operations. ANSYS has not traditionally participated in this area, which is growing due to the increasing number of missions. Historically, customer needs were partially addressed by commercial software with multiple applications all by in-house codes.

AGI has a purpose built solution for mission analysis and simulation, and has become a leading firm in this area. By combining forces with AGI, we will be able to address a broader opportunity called digital mission engineering, which combines mission simulation and analysis from AGI and components and system level simulation from ANSYS. Our combined portfolio will enable customers to simulate up and down the stack, starting at the chip level and going all the way up to the customer’s entire mission, thereby increasing the likelihood of success and saving customers’ time, money, and other crucial resources.

You may remember that we formed a partnership with AGI last year. And one of the results of that alliance with the connection between its products and Ansys HFSS our flagship electromagnetic solver. Several large customers are using both companies’ products together. One large prime contractor, for example, uses AGI software to track the radar visibility and signal availability between various mission assets and then employs Ansys HFSS to analyze the quality of that visibility and connectivity.

Here’s another example to make it more concrete. The use of simulation to plan the successful deployment of a new telecommunication satellite. First, AGI’s mission and orbital simulation capabilities can help ensure that the launch and the orbit of the new satellites avoids the collision with other objects in space. Furthermore, the combination of AGI’s capabilities and Ansys HFSS can simulate the relative position and communications capabilities of the satellites to other orbiting telecommunication satellites and to terrestrial base stations to help ensure that the satellite will perform as expected when deployed.

We will be in a position to share more with you about our plans with AGI after the transaction closes. Before I turn the call over to Maria, I’d like to discuss two important topics. The ANSYS Cloud offering, and our commitment to ESG. ANSYS Cloud, which enables our customers to access high-performance computing in the public cloud. It’s critically important with so many customers continuing to work remotely during the pandemic. ANSYS Cloud is built on a close collaboration with Microsoft and its Azure platform.

Today, ANSYS Cloud customers can use the majority of our mechanical, fluids and electromagnetics products on the latest and highest performance compute and networking infrastructure available in the market. Furthermore, ANSYS Cloud supports flexible consumption models, lowering the barrier to entry for customers. These include an elastic pay-as-you-go model that gives users SaaS access to ANSYS products and high performance computing infrastructure and Azure for greatest convenience.

A bring your own license model that allows customers to use their existing ANSYS lease licenses, thus preserving their existing investments, and a hybrid model that enables customers to mix and match elastic and lease licenses for greatest flexibility. The demand for ANSYS Cloud continues to increase with usage doubling in the last six months. For example, joint ANSYS Microsoft customer, Rockwell Automation is using ANSYS Cloud to accelerate its product development processes.

The company has reduced simulation runtimes by 50%, enabling users to solve larger problems more accurately. Whilst, we are excited about our public cloud offering and encouraged by a rapid progress. It is important to note that the majority of our customers view ANSYS products on premises in their own data centers or in private cloud, such as the Government Agency, I mentioned earlier. As such, we expect our ANSYS Cloud offering will remain a relatively small piece of our business for the foreseeable future.

Finally, we are continuing to advance our environmental, social and governance programs. In Q3, we submitted our 2020 climate change report to CDP, which helps us identify our internal environmental risks and opportunities. This information is available on our Investor Relations website. We are also analyzing the benefits in environmental sustainability that our solutions enable for our customers and plan to make that information publicly available when ready.

To summarize, Q3 was another strong quarter. Thanks to great execution from our global team of dedicated employees and channel partners. Our compelling value proposition of helping customers to decrease costs, while spurring topline growth continues to gain traction in the market. Those factors combined with our close customer relationships, the power of ANSYS products and the strength our pipeline gives us continued confidence as we work to deliver against our objectives to the remainder of 2020.

With that, I’d like to turn the call over to Maria to discuss our financials for Q3, as well as the details around our outlook and the assumption for the remainder of the year. Maria?

[Maria Shields]

Thank you, Ajei. Hello everyone. We’re very pleased to report another quarter of strong financial performance, driven by the team’s ongoing focus on execution. I’ll walk through an overview of the Q3 financial highlights and then add some additional qualitative and quantitative color around our outlook and key assumptions for the final quarter of 2020.

Before I begin, I’d like to take a moment to again, say, thank you to the ANSYS team. As part of our efforts to keep employees safe and healthy, most of our colleagues continue to work from home throughout the third quarter. And as we previously communicated, this will continue to be the case throughout the remainder of 2020. Our Q3 results reflect the stability of the ANSYS business model. Even in the backdrop of a prolonged global pandemic. We finished the quarter with total revenue of $369 million or constant currency revenue growth of 5% and operating margin and EPS results that were both about the high end of our Q3 guidance.

Consistent with the first half of the year, our revenue in Q3 was driven by solid sales execution. Other key financial metrics for the third quarter continue to be strong, with ACV of $305 million, of which 78% is coming from recurring sources. This is a new record for Q3, with respect to both total ACV and the percent that is attributable to recurring sources.

Q3’s results reflect the continued trends into strong lease sales that we’ve been experiencing throughout 2020, with a 10% increase in lease license revenue. This combined with high renewal rates on maintenance contracts contributed to building our deferred revenue and backlog to a Q3 record total of $880 million, a 35% increase over last year’s comparable balance.

The solid topline results combined with our focus on fiscal discipline help to drive a third quarter gross margin of 89% and an operating margin of 39.8%, which finished above the high end of our Q3 guidance. In line with the plan that we communicated last quarter, we continue to manage our business and reduce level of discretionary spending, particularly in the category of business travel and entertainment. While we also continue to manage the business at a reduced pace of hiring, we did increase our employee base by 143 employees in the third quarter.

The net result was third quarter EPS of a $1.36, which finished above high end of our guidance and which benefited from the combination of the solid revenue results and ongoing fiscal discipline. With respect to taxes, our effective tax rate in Q3 was 19.5%, which is the rate that we expect for remainder of 2020. We further strengthened our cash and balance sheet position in the third quarter with cash flow from operations that total of $94.5 million and we closed the quarter with a total of $845 million in cash and short-term investments.

We remain confident that we have ample liquidity to continue to progress against our long-term strategy, while at the same time remaining cognizant of the uncertainties that exist in the current business climate.

Now, let me move on to the topic of guidance. Coming off another strong finish in Q3, combined with our current outlook regarding the strengths of the pipeline of opportunities for the balance of 2020, we are increasing both the high-end and the mid-point of our ACV revenue and earnings outlook for the full year.

Let me just add that we have excluded the impact of the AGI acquisition from our updated guidance, because the closing date is not certain. To the extent of the deal closes in the fourth quarter, as we expect the impact on our non-GAAP financial results will be immaterial. Now, let me move on to the specifics of our outlook. For Q4, we expect non-GAAP revenue in the range of $542 million to $582 million and non-GAAP EPS in the range of $2.36 to $2.67.

For the full year, we are increasing our outlook to non-GAAP revenue in the range of $1.610 billion to $1.650 billion or constant currency growth in a range of 5% to 7% and EPS in the range of $6.09 to $6.40. We are also increasing our full year 2020 ACV outlook to a range of $1.555 billion to $1.590 billion or constant currency ACV growth of 6% to 8%.

With respect to the remainder of the year, we expect a similar business environment in Q4 to what we experienced in Q3. That being said, we have a pipeline of enterprise customers with scheduled renewals for multi-year leases and with whom we are in active negotiation as part of their process of planning their R&D spend commitments for the remainder of the year and beyond.

In line with what we’ve experienced since the health crisis first began in late Q1, we expect that the effects of the pandemic will continue to adversely impact our levels of new business, particularly in the SMB space and disproportionately affecting perpetual licenses. Our outlook for the remainder of the year, factors in everything that we are currently aware of with respect to ongoing trade discussions and customer sentiment across our geographically and industry-diverse customer base.

It also reflects an increase in sale and third-party commission, as we head into the largest ACV quarterly of the year. With respect to annual operating cash flow, we are maintaining our outlook for 2020 in the range of $435 million to $475 million. This is reflective of our current view on full year ACV revenue, profitability estimates and tax payments. We have also factored into our outlook, the adverse impacts of customer payments that will be delayed into 2021, because of extended payment terms negotiated on new contracts and delayed payments on existing contracts.

We’re maintaining our estimate of these payments related negative impacts by 2020 operating cash flow to be in the range of $15 million to $25 million. Our outlook on operating cash flow also takes into account, a recent unfavorable tax assessment, which we are estimating will have a negative impact of $10 million in 2020, the majority of which is expected to be recaptured in 2021’s cash flow.

Looking ahead to Q4, we’re expecting operating margin in the range of 47.5% to 49.5%. And for the full year in line with our previous outlook, we’re expecting to finish the year with industry leading operating margins in the range of 41% to 42%. Further details around specific currency rates and other key quantitative and qualitative assumptions that have been factored into our outlook for Q4 and 2020 are contained in the prepared remarks document.

Consistent with our standard practice, we will provide detailed 2021 guidance, once we finalize our 2021 annual planning process and close out 2020. We are very fortunate to finish Q3 with strong financial and operational results. These results are a testament to both resiliency of the ANSYS business model and to the tenacity and dedication of our employees, customers and partners.

In closing, we are also very excited about the pending acquisition of Analytical Graphics. As you saw in the recent press release announcing the deal, we will pay $700 million for AGI with its shareholders receiving 67% of the purchase price in cash and 33% in ANSYS common stock. We expect to finalize closing later in Q4.

With respect to 2021, we expect the deal to contribute an additional $75 million to $85 million of non-GAAP revenue. And then it will be modestly accretive to non-GAAP EPS. This acquisition is yet another milestone in our continued deployment of capital to grow and expand our business and our leadership in this exciting and growing market.

Operator, we’re now ready to open the call for questions.

[Operator]

We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tyler Radke of Citi. Tyler, please proceed.

[Tyler Radke, Citi]

All right. Thank you very much, and good morning, everyone. I wanted to ask you just a little bit more about the – your confidence level heading into Q4. It seems like from kind of the qualitative commentary are expecting somewhat of a continuation of the deal environment you saw in Q3. And if my math is right, it suggests that you’re expecting to grow ACV stronger than I think mid-teens, which is stronger than you’ve grown ACV and in a number of years. So maybe just talk about what’s behind the confidence in such a strong Q4 forecast or the deals that got pushed out at Q3 that you expected to close in Q4. Just give us a sense of what you’re seeing in the pipeline. Thank you.

[Maria Shields]

Yes. So, Tyler, thank you for the questions. With respect to – I’ll just comment on Q3. Q3 played out largely in line with what we had expected, no real surprises there. Q4, as we’ve been saying, quite frankly, all year long, the year was going to be very back-end loaded. And that is just a result of all of the multi-year leases that are scheduled for renewal in Q4. And we have a high level of confidence based on not only what we’ve been able to execute upon in the first nine months in a year, but more importantly, these are relationships with long standing customers of which we’ve grown our footprint and the importance and criticality of simulation to their R&D and product life cycle.

So we’re highly confident and we know we’ve got a great team and we’ve demonstrated in the first nine months that we’re able to engage with customers and to close large deals. And so that’s what gives us the confidence that we’ve got a strong pipeline. We’ve got good visibility into the quarter and compared to where we were in August, we’ve obviously been in active conversations with a number of these customers. And so all of that is what gives us the confidence in the increased outlook that we put up this morning.

[Tyler Radke, Citi]

Great. Thank you.

[Operator]

Our next question comes from Ken Wong of Guggenheim Securities. Ken, please proceed.

[Ken Wong, Guggenheim Securities]

Great. Thanks for taking my question. Maybe – Ajei or Maria, maybe to put a final point on what’s higher of asking. Just wondering, did you guys see anything in the underlying KPIs that gave you this higher confidence in terms of whether its pipeline conversion, sales cycles shortening and uptick in new business? This – from our end, with the macro still a little soft, we’d just love to get a sense for kind of what you guys see internally that gives you this elevated confidence.

[Maria Shields]

Yes. What I would say is, Ken, no different than what we’ve seen all year. As I said, if you’ve listened to the script, while we’ve seen an impact in SMB and some of the new business, when it comes to these renewal, now that we’ve shifted away from a perpetual model to a lease model, the reality is the customers need to make sure that we close those deals in Q4, so that they can continue to have access to the technology, that’s critical to their R&D process. So it’s the visibility, it’s the ongoing relationship and it’s the critical nature of what we provide to our customers that continue to give us confidence that we’ve got a strong pipeline and that Q4 is going to be – but, frankly, the largest quarter in the company’s history.

[Ajei Gopal, President and Chief Executive Officer]

And from an operational execution perspective, just to add on to what Maria said, if you look at Q2, for example, we closed the largest deal in the history of the company, while everyone was working from home. At a time, when I think people had a much more bearish view of the situation with the coronavirus, as perhaps we’re seeing in the market right now.

And if you look at Q3, we just – as you heard in the comments, we announced a closing of a very large deal, the second largest in the history of the company, and once again, but people working from home. So that gives you some perspective for our ability to execute in this environment. And I’d give you some perspective about the nature of the relationships that we have with a customer. And as Maria was saying, when we have these large deals, it is not just an opportunity for us to renew the existing business. It’s an opportunity for us to sell more new ACV and new capabilities, and we’re able to do that. And we’ve demonstrated that through the year and we are – and that’s the reason for our confidence in the fourth quarter.

[Ken Wong, Guggenheim Securities]

Great. Thank you guys.

[Operator]

Our next question comes from Jackson Ader of JPMorgan. Jackson, please proceed.

[Jackson Ader, JPMorgan]

Great. Good morning, everybody. Thanks for taking my question. Just following up, Ajei, on the large deals, so you just mentioned, I think both of them in the second and third quarter was five-year deal. Is maybe the lengthening of contracts becoming something that you’re seeing a key theme as you’re getting these deals across the finish line? The backlog and combined backlog and long-term backlog and said revenue is that far more than revenue growth in the quarter? So just curious, if you’re seeing lengthening contract terms from all areas of your business.

[Maria Shields]

Yes. So Jackson, what I’d say is, those five-year deals are still an anomaly. And what I say is, if you look at the particular customers that have decided to extend the five-year deals, some of them are already two or three cycles into these leases, these multi-year leases. And so they’ve got a lot more confidence. And they also tend to be in verticals, where the product lifestyle – life cycles are much longer. And they’ve been using simulation for much longer than some of the customers. So the combination of all those factors is what’s really driving them to have the confidence to extend the term, so that they can plan accordingly and we can work with them on successful deployment of particularly new technologies that they’re trying to roll out across their R&D teams.

[Jackson Ader, JPMorgan]

Okay. That’s helpful. Just a quick follow-up, given the election session, everybody’s mind and maybe some talk about some infrastructure spending, how exposed do you guys feel that the ANSYS portfolio is to increase infrastructure spending here in the U.S.

[Ajei Gopal, President and Chief Executive Officer]

Well, look, I mean, I think the – what we’ve given you in terms of guidance is essentially based on the view that we have into our pipeline and the forecast that we’ve gotten from our team. So that’s very concrete, it’s not speculative based on potential directions that investment may or may not go. So we’ll be giving us a very specific concrete way of thinking about our business. Obviously, if there continues to be more investment in areas where people are using more technology, more equipment that obviously translates into the tailwind for ANSYS, that’s obviously the case. But we haven’t factored in any hypothetical incremental investment in infrastructure for our Q4 analysis.

[Jackson Ader, JPMorgan]

Okay. Makes sense. Thank you.

[Operator]

Your next question comes from Jason Celino of KeyBanc Capital Markets. Jason, please proceed.

[Jason Celino, KeyBanc Capital Markets]

Hi, thanks for taking my question. The acquisition of AGI space seems to be a new frontier for you guys. But maybe can you talk about, maybe the split of recurring revenue for that business and have they any perpetual revenue or services and maybe how fast that company was growing before the upcoming acquisition. I know there’s a lot of synergy, but maybe some background a little bit.

[Maria Shields]

Yes. So Jason, I’ll say is, it was a private company that perhaps U.S. GAAP was not exactly how they kept track of their books and records as we do as a public company. And we didn’t spend a lot of time going back and trying to recreate what their GAAP results would look like. They were growing, they were profitable and absolutely, we are very excited about the opportunity to extend our presence in aerospace and defense.

Particularly, as you think about, over the course of the next decade, we are lot of that spend is going to be coming from. I mean, the amount of investment that the private sector is putting into space is incredible and satellites and all of these mission critical systems, where the synergy between the technology that AGI has and our technology as demonstrated from the early successes we saw in our partnership. We’re very excited about the long-term opportunity to marry that business with the ANSYS business and to expand our presence in that important and growing vertical.

[Jason Celino, KeyBanc Capital Markets]

Great. Thank you.

[Operator]

And our next question comes from Gal Munda of Berenberg Capital Markets. Gal, please proceed.

[Gal Munda, Berenberg Capital Markets]

Hi, good morning, everyone. Thanks for taking my question. I thought one, it was just kind of a follow-up on the deals that you’re reviewing over the next quarter and the next few years. Can you just talk to us a little bit about the potential, when you negotiate these deals, how did they work hard in terms of the land and in terms of the uplift that you’re seeing, maybe you can talk us for kind of a typical deal, if that – if such things exist? And are they linear in terms of spend? Or are you seeing kind of a ramp progression as clients expect to use more of your portfolio over time when the kind of larger contract is signed? Thank you.

[Ajei Gopal, President and Chief Executive Officer]

Yes, I don’t think there’s a one-size-fits-all that you can really apply to these deals, especially when you’re dealing with larger customers, using multiple product lines. A lot of the opportunity within the account depends on the nature of the programs that customers have. In some cases, they have activities or programs where they’re using simulation, and you can really see the growth of the use of simulation, and that’s kind of factored into the way the deal is structured.

And in some cases, in a multi-year deal. And in some cases, you’ll see the desire not just to increase the number of users, but maybe to bring on a new technology and start to work and add a new technology capability to that. So it really – there’s no one-size-fits-all. But what we try to do when we sit down with our customers and work through the details of a multi-year deal is to really understand the demand dynamics within the customer. We usually have a pretty good sense of where the usage is. What they’d like to try to accomplish, map that against our capabilities, and then that’s how we find the basis of a conversation in the agreement.

[Gal Munda, Berenberg Capital Markets]

Got you. So just to kind of follow-up on that. Do you think that when you sign $70 million or $100 million deal, is that – is it a linear kind of expense? Or does it have the ACV itself doesn’t just average out over the years because of the fact that they might be ramping up more over the years when you expect more users to come onboard, is that a fair assumption?

[Ajei Gopal, President and Chief Executive Officer]

I think, as I said, there’s nothing that we can give you that that’s standard for every single deal. It will vary on a deal-by-deal basis. And so the objective – our objective is to make sure that we can satisfy our customers’ needs by getting them as much technology as they can take advantage of. And in many cases, you’ll see customer usage varying on programs, and in some cases, wrapping up. And so that’s really reflected in this. I cannot tell you on a one-size-fits-all because it’s very bespoke on a case-by-case basis.

[Gal Munda, Berenberg Capital Markets]

Thank you, Ajei. Appreciate it.

[Operator]

Your next question comes from Jay Vleeschhouwer of Griffin Securities. Jay, please proceed.

[Jay Vleeschhouwer, Griffin Securities]

Thank you. Good morning. Ajei, starting with you a technology question, stemming from your conference back in June Simulation World and then more recently, the Semiconductor Conference. And then tying that into the AGI acquisition, so there were a number of reference is your events that got my attention, having to do with what we described as ANSYS domain-specific applications and industry solutions.

And so the question is, should we expect more and more over time, more explicit dedicated domain- applications or industry solutions as commented on at your conferences? And then tying that into AGI, you use the interesting phrase that it’s purpose built. And I’m wondering if there might be some more earthbound applications rather than just space, for example, wouldn’t autonomous vehicles have the same use cases, let’s say, satellites in terms of interactions and controlling missions and the like.

And then just from where we – going back to your hiring comments, what catalysts or conditions would you need to see to widen that aperture back open some more? I mean, right now, you’re running in terms of your openings, around 3% of headcount, you’ve typically been 5% or more of your headcount in open rec, so what do you need to see before you open that up some more?

[Ajei Gopal, President and Chief Executive Officer]

Okay. So let me start, Jay, with the first part of your question, let me start with that one. Look, you’re absolutely right to observe that. We have been able to bring integrated multi-physics capabilities to market to address the needs of our customers. We’ve talked about 5G, we’ve talked about electrification. These are all capabilities that require multiple physics working together, a true multi-physics capability with a workflow and integrated data flow and automation that goes with that.

Rotating machinery, for example, there are many examples that we can point to. The infrastructure that we’ve built within our portfolio not only the world class solvers and physics capabilities that we have with the infrastructure that we’ve built with Minerva, with our platform capabilities around [indiscernible] and so forth, have all given us the ability to much more effectively and rapidly integrate these solutions or these technologies together to address the needs of customers.

And so you’re starting to see some of these domain-specific solutions being made available because it’s so much easier to be able to integrate our technologies together to create this multi-physics capability. So absolutely, you should see more of that. The side effect of that is it becomes easier to integrate active acquired technologies into our portfolio as well.

The second part of your question was, you made the observation that mission simulation and connecting that with component level and system-level simulation, you made the observation that there may be other use cases other than space and satellite. And the answer, of course, is there’s certainly other use cases that one could imagine, telecommunications, for example, 5G infrastructure, you mentioned autonomous vehicles, these are all potential future opportunities that we would have to export to evaluate whether those would be opportunities for us to engage with.

[Maria Shields]

And Jay, with respect to the hiring comments, what I’d say is as you know, we’ve reduced our planned spend early in the year when the pandemic began to impact the business. And with the recent extended lockdowns in EMEA, in certain parts of the United States, we just think there’s still enough volatility and uncertainty that it makes more sense for us to continue to be prudent in our hiring and in other things that are not critical to the long-term success of the business.

And additionally, as we think about Q4, our plans are to go ahead and close AGI, which will add a couple of hundred new employees into the ANSYS family. So I would think much more certainty around the pace of recovery in the overall global economy would make us much more comfortable to perhaps return to a more rapid pace of investments, as you saw perhaps in 2018 or 2019. But right now, I think it’s a little bit too early for us to pull the trigger on more increased investments, particularly in the hiring front, given that, that’s 70% of our spend.

[Operator]

Our next question comes from Adam Borg of Stifel. Adam, please proceed.

[Adam Borg, Stifel]

Hey guys, and thanks for taking the question. Just on the ANSYS Cloud, it seems like your recent partnership announcement with Microsoft was a nice expansion. I guess I’m thinking in terms of the new physics as well as the go-to-market offerings or the joint go-to-market efforts. I’m just curious, are there any technical limitations to bringing the rest of your simulation portfolio over to ANSYS Cloud? I know, Ajei, you mentioned you’ve continued to expand. Are there any limitation, bringing the rest of it over? And I guess as a follow-up, are our customers asking about ANSYS Cloud-like offering that may run on top of AWS or GCP, just given their unique needs? Thanks so much.

[Ajei Gopal, President and Chief Executive Officer]

Firstly, we have customers who are using ANSYS technology on multiple hyperscaler infrastructures. And that’s the reality of the situation today. The ANSYS Cloud offering per se, the one that we take to market is running on top of Azure. And there really isn’t any fundamental restriction on the capabilities that we could make available on ANSYS Cloud. We have our flagships on ANSYS Cloud, and we will continue to add capabilities to that – to the cloud offering as it makes sense.

So it’s – you should look to us to continue to make investments in ANSYS Cloud, you should look to more capabilities in there. But we have to be cognizant of the fact that, as I’ve explained in my comments, we have to be cognizant of the fact that our customers, for the most part, are still running on-premises in their own data centers or in private clouds. And our objective is to make sure that our technology is there. It’s available and ready to go. And as and when the customers are ready, we’re able to support them with ANSYS Cloud.

[Adam Borg, Stifel]

That’s great. And maybe just a quick follow-up for Maria. Just a bit of housekeeping. Could you just comment – and I’m sorry if I missed it, but could you comment on the inorganic contribution from both revenue and ACV, not just for this quarter but expectations for 4Q? Thanks so much.

[Maria Shields]

Yes. So for Q3 in the first nine months, it’s about 6%, and for the full year, Adam, it’s about 5%.

[Adam Borg, Stifel]

Excellent, thank you. Thanks, again.

[Operator]

[Operator Instructions] Our next question is going to come from Saket Kalia of Barclays. Saket, please proceed.

[Saket Kalia, Barclays]

Okay, great. Hey, thanks for taking my questions here guys. Most of mine have been answered, but maybe for you, Maria, just off to the last question. Good to see that increase in ACV versus the prior guide you provided last quarter. Can you just remind us how much of that increase is coming from changes in FX recently? And maybe just also remind us what the new ACV guide reflects in terms of organic constant currency growth?

[Maria Shields]

Yes. So Saket, what I would say is currency did not play a factor in our increasing our outlook for the key metrics that we were able to increase. The rate are basically within the ranges that we used when we guided in August. It’s really the increased visibility and strength of the pipeline that were the underlying factor in our deciding to go ahead and increase our outlook now that we are actually in Q4 and have much greater insight into the likelihood and probability of those deals closing. And for the full year, inorganic contribution was 5%.

[Saket Kalia, Barclays]

Got it, very helpful. Thanks, guys.

[Maria Shields]

Thank you.

[Operator]

This concludes our question-and-answer session. I’d now like to turn the conference back over for any closing remarks.

[Ajei Gopal, President and Chief Executive Officer]

Thank you, operator. As I think about the remainder of the year, I’m excited by our continued execution, our diverse customer base and our strong pipeline. Our customers continue to rely on simulation and our ability to close large deals remotely only adds to that excitement and confidence. In closing, I would like to express my sincere gratitude to our customers and to our partners for their continued support. And a special thank you to my ANSYS colleagues around the world, your work continues to inspire. You have my gratitude for delivering another strong quarter. Thank you, everyone, for joining the call today. Please enjoy the rest of the day.

[Operator]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.